The Sucker of Last Resort

During the past six months, I have written numerous articles of why the Fed cannot taper Quantitative Easing, for any reason. And I’m not talking about the possibility of a miniscule $10 billion/month reduction – as has been rumored for the December 18th FOMC meeting. This may or may not happen; but if it does, will likely be countered by covert buying and overt policy change once the Fed realizes such a catastrophic decision catalyzed surging bond yields.

Conversely, what I’m talking about, at its basest level, is a global economy dependent on rates artificially held at their lowest levels in seven centuries by Central bank monetization; led, of course, by the “granddaddy of money printing itself” – the Federal Reserve. In reality, the global “economy” died in 2008 – or perhaps, as early as 2000 – replaced by expanding levels of monetary and fiscal stimulus that can never, ever end; that is, until the fiat currencies underlying them collapse.

However, aside from this blinding reality, there are countless other reasons why the Ponzi scheme that is “quantitative easing” can never end; and worse yet, will eventually need to be expanded. In April, for example, I wrote of the “duration trap” caused by the Fed expanding its Treasury holdings from T-bills to long-dated notes and bonds, upon commencement of “Operation Twist” two years ago – and ultimately, “QE3” and “QE4” last Fall. In other words, by dramatically increasing the duration of its own portfolio, the Fed has exposed itself to catastrophic losses if interest rates make even tiny upward moves (which this Fall, they have). Moreover, in September I wrote of the adverse impact on “shadow banking” of the Fed consuming such a large proportion of “tier one” collateral; given how shadow banking – i.e., the unregulated activities of “non-bank” entities – is now as large as the traditional banking centers.

But the “straw that broke the camel’s back” was revealed in thisarticle comparing the Fed’s monopolization of the Treasury and mortgage markets with the Hunt Brothers’ supposed cornering of the silver market in 1979. Only then, the Hunt Brothers’ capital was limited; as opposed to Fed printing presses, which have no limits.

According to the article – and the below chart – the Fed now owns 33% of all Treasury issuance, including 40%-45% of all ten-year equivalents; let alone, the nearly 50% of mortgage-backed bonds I reported in earlier articles. Worse yet, if QE4 is not tapered, the Fed will own an incredible 50% of all outstanding Treasury bonds – and perhaps, 60%-70% of mortgaged-backed bonds – by the end of 2014.

Since 2008’s Global Meltdown I, the Fed has correctly been labeled the Treasury “buyer of last resort.” Which is exactly what it has become, given the Chinese and Japanese are no longer buying. And in the case of the latter, could become major sellers now that they no longer intend to acquire foreign currency reserves. And thus, whenever you get caught in the noise that is “taper talk,” don’t forget that T-bond supply must increase to finance ever-expanding deficits, while only the Fed has been a significant buyer. To wit, it is estimated that 90% of all 2012 Treasury issuance was consumed by Fed monetization; which, I’d bet, is not far off from the 2013 level. And if the Chinese are no longer buying – let alone, if they are selling, than who is left to acquire 2014 issuance but the “sucker of last resort?”

1 Comment

jer
on December 10, 2013 at 6:04 pm

Deficit financing but also rollover of the $17 trillion must be refinanced…by whom?

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